Friday, 9 December 2011

Two Speed Europe?

We've all woken up this morning to the breathlessly conveyed news that the European political elites have staged an all nighter with the result that most of them have agreed to sign up to a new Treaty to deal with the crisis in the Eurozone. But not Britain.

Predictably, the initial coverage in our domestic media is very much focused on the 'Europsceptic v Europhile' axis. Some idiot Tory backbencher seemed to claim we had left the EU on the the Today programme. This is plainly not true, but we do now formally have the much heralded 'two speed Europe'' coalescing before our eyes. 

Or we do if this new Treaty actually materialises and gets anywhere close to being implemented. This seems rather more important - and rather more of an open question - than the initial UK coverage is allowing for.

To recap: several European nations are, in effect, broke or teetering on the edge of insolvency (this is sometimes dressed up as 'experiencing severe liquidity problems'). For some of them this is primarily  a result of decisions to support failing banks, for others it is perhaps more about failing to establish any kind of effective tax regime.  They mainly owe the money to French and German banks - including, Peston says, increasing quantities to the Bundesbank itself.  This money is denominated in Euros. Let's put it politely: there are very reasonable grounds for suspecting these debts will not be paid or even serviced by the payment of interest. This might yet break the Euro and cause a disorderly return to national currencies - an event that could plunge the world into depression.

So the new Treaty is about imposing a unified fiscal regime on all the signatures subject to qualified majority voting. In other words, a very, very significant slice of national economic policy will be subject to ultimate control by 'Brussels' (understood as a Franco-German hegemony), not national parliaments. Since everyone pays at least lip service to the idea that the way out of the problem is growth ( because debts are easier to pay off out of a growing pot) the question becomes what policies should be pursued to achieve growth - and Brussels will get the final say on what those policies should be. & they really won't include deficit spending on Keynesian stimulus lines:

" Eurozone states' budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of gross domestic product.
• Such a rule will also be introduced in eurozone member states' own national legal systems; they must report national debt issuance plans in advance.
• As soon as a eurozone member state is in breach of the 3% deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of eurozone states is opposed."
 In short, this is a recipe for a Treaty which cuts living standards and the social wage across Europe by over-riding democratic mechanisms. Now Cameron et al have no objection to that per se - how could they, given their domestic policy ? - their beef is with the idea that the City of London might end up being regulated by Brussels rather than (un)regulated by Whitehall or the Bank of England. & it is the City of London and other bourses which have done so much to create this web of unsupportable credit in the first place. So the likes of Richard Murphy find themselves 'strangely conflicted' between a passed up opportunity to control the banksters and sighing with relief at escaping diktat by bureaucrat.

But let's leave that aside for a moment. Let's ask another question - are the plans for this new Treaty actually plausible? Will the peoples of Europe accept them? Or will various European governments, under pressure from their electorates,  find themselves increasingly looking for 'workarounds' just as they did over Maastricht and Lisbon? The 'optics' of this proposed new Treaty are all wrong - its an elite deal stitched up without reference to anyone. It's going to be be terribly politically fragile even if it does manage to stagger through to an actual signing.

The real two speed Europe we should be talking about is not Britain v (most of) The Rest - its about how the politics and the economics of this crisis are working at such different paces from each other, and have to work at such different paces or have governments face the loss of democratic legitimacy. This new Treaty seems an attempt to subsume the political  dynamic to the economic one, defined purely as the economics of financial markets.

The gut feeling of this non economist is that it ain't going to work. 


Mason observes: enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy.

It has done what the US Republicans would like to do - and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal.

What's more no one yet even certain if it will convince the markets

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